credit card debt

The Pros and Cons of Paying Off Your Debt Early

Tim Lemke — Sun, 11 Oct 2020 17:32:44 +0000

Debt stinks. We all know this. The sensible move here is to pay off any and all debts as soon as possible, right? Not so fast. In some cases, paying a debt off early doesn't save you all that much money. Let's take a look at the pros and cons of paying down debt before you have to.

Pro: You'll save thousands of dollars in interest

You can't take out a loan without paying interest. You also can't carry a credit card balance without paying interest. And the longer you owe money, the more interest you'll pay. Let’s say you buy a car for the price of $25,000, and you borrow $20,000 at an interest rate of 3 percent on a 60-month loan. That could mean more than $1,500 in interest payments over the course of five years. What a waste, right?

So whether it's a car loan or credit card debt, the sooner you wipe it out, the more money you'll save in interest payments, and depending on the balance, this could mean hundreds or even thousands of dollars. (See also: 15 Tips From People Who Paid Off an Incredible Amount of Debt)

Con: You may have paid off most of the loan interest already

Most loans have something called an "amortization schedule" that maps out how much you'll pay in interest and how much you'll pay in principal each month. With many loans — especially mortgages — you pay most of the interest in the early years and pay mostly principal later on.

For example, let's say you have a 30-year loan of $300,000 with a 5 percent interest rate. Using this handy amortization calculator, this means you'll pay $1,610 per month. (For simplicity purposes, I am not including taxes and insurance in this calculation.) A typical amortization schedule shows that you will pay $1,250 per month in interest payments at first. But toward the end of the lending period, your interest payments are much lower. By the time you have three years left on the loan, you'll pay a little over $200 in interest per month and it will continue to decline from there.

If you are fairly late in the loan term, there's not a major financial advantage to paying your loan off early. You're practically borrowing money interest-free at this point, so you might as well hold onto your cash or use it for something else. (See also: 5 Debt Management Questions You're Too Embarrassed to Ask)

Pro: You free up cash for other things

Your mortgage is $1,500 a month. Your car payment is $200 per month. Your student loan payment is $180. The minimum payment on your credit card balance is $250. If you're locked into these payments each month, you may not have a lot of money left over for other needs or wants. Debt prevents you from having true financial flexibility. Pay those debts off early, and breathe easier knowing you've freed up a significant amount of cash.

Con: You could deplete your emergency fund

Your drive to pay off debt early may be strong, but where is that money coming from? It's not easy for most people to pay off the $20,000 left on a mortgage in one fell swoop, for example. If you do have that much cash available, you need to make sure it's not coming out of your emergency fund. It may feel good to pay off a debt, but when you have no money left to cover a medical emergency or job loss, you're playing a dangerous game. It's best to keep at least three months worth of living expenses on hand in cash, and avoid the temptation to raid it just to pay off a debt early. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Pro: You'll sleep better

For many people, carrying debt from month to month is physically and mentally exhausting. It weighs on you. And that's totally understandable. Everyone has their own comfort level with debt, and if you simply can't stand the thought of even a small debt burden, pay those loans off in full if you can. In many cases, paying off a debt early offers a mental and financial freedom. (See also: How Getting More Sleep Helps Your Finances)

Con: You might stop building credit

Believe it or not, paying off debt early may actually hurt your credit. If you insist on always clearing debts in full long before they are due, you may cease to have enough credit history to get a favorable rating from credit agencies. As long as your debt burden is not too high, making consistent, regular payments on debts and paying bills on time is the best way to build strong credit.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How a Credit Card Can Actually Help You Get Out of Debt

Holly Johnson — Thu, 08 Oct 2020 17:32:44 +0000

If you have high-interest credit card debt, you may believe another credit card is the last thing you need. Another card would only leave you with more open credit after all, and that just means more temptation to spend and rack up even more debt.

But a certain type of credit card debt could help your situation — if you use it the right way. This type of card is a balance transfer card.

How balance transfer cards work

Each balance transfer credit card has its own unique introductory offer you can use to your advantage. Most offer 0% APR from 12 to 21 months, meaning you won't pay interest on transferred balances during that time. However, some balance transfer cards charge a balance transfer fee that typically works out to 3% or 5% of the balance you transfer over.

To illustrate, let's imagine for a moment that you have $10,000 in credit card debt at 19% APR and you're currently making a payment of 5% of your balance, or $500 per month. At this rate, it would take 25 months to pay off your debt, and you would fork over $2,120 in interest over that time.

Now, let's say you apply for a balance transfer card that gives you 0% APR for 21 months in exchange for a 5% balance transfer fee. Once you transferred your entire balance over and added in the fee, you would start repayment owing $10,500 ($10,000 plus a $500 balance transfer fee).

However, the fact that you're not paying interest means you could continue paying $500 per month and pay off your entire balance with zero interest in 21 months. In other words, your balance transfer card could shave four months off your repayment timeline and save you $2,120 in interest. (See also: Here's What a Balance Transfer Does to Your Credit)

Tips for a successful balance transfer

The example above shows why balance transfer cards are so popular. Sure, some of them charge balance transfer fees, but having 0% APR for anywhere from 12 to 21 months can help you get out of debt faster, and lead to thousands of dollars in savings.

According to estimates from Experian, Americans conduct $35 to $40 billion in balance transfer activity each year. This is good news for consumers who are taking advantage, but it's also troublesome since many people get stuck in a situation where they're transferring the same debts to new balance transfer cards every few years.

If your goal is using a balance transfer credit card to get out of debt and stay out of debt, you'll want to set yourself up for success. Here's how you can do that.

Compare offers

Because balance transfer cards each have their own introductory offers, you need to check out more than one. Ideally, you'll settle on a balance transfer credit card that grants you 0% APR for as long as you need to pay down all (or most) of your debt.

Other factors to consider with balance transfer cards include any fees they charge, consumer perks and protections, and rewards programs. However, beware of signing up for balance transfer cards with rewards programs if you worry they'll entice you to spend. The goal with a balance transfer card is paying down debt — not racking up more.

Look for cards that don't charge a balance transfer fee

Keep your eye out for balance transfer cards that don't charge a fee. While most charge a fee to transfer balances upfront, there are several that skip over this fee for balances transferred in the first 60 days. Avoiding this fee will normally save you 3% to 5% of your balance amount, which can help you start paying down your balances right away.

Stop using credit cards

No matter what you do, stop using credit cards once you've transferred your balances to a card that offers zero interest for a limited time. You won't want to use your new balance transfer card for purchases since the goal is paying off your debt, but you should also steer clear of using other credit cards since you could easily rack up more debt and eliminate any progress you've made.

While you're in debt-repayment mode, you should stick to a cash budget or use your debit card instead of credit. That way, you won't "accidentally" rack up new credit card balances you can't afford to repay.

Create a debt repayment plan

Finally, don't forget to create some sort of debt payoff plan for how you'll pay down debt during your card's introductory offer. You should estimate how much you can afford to pay each month and figure out how much debt you'll ultimately pay off if you stay on track. If you can manage to pay off your entire debt over your card's 0% APR offer with a specific payment amount, you should determine if that figure is possible with your monthly income and expenses. And using a good debt repayment calculator can help a lot.

You may also want to look for ways to cut your spending and bills so you can throw more money toward your credit card's balance each month. Start with the low-hanging fruit in your budget — things like grocery spending and dining out, entertainment spending, or regular trips to your favorite department store. Also consider uninstalling any apps on your phone that regularly cause you to spend money, whether it's Instacart, DoorDash, or Amazon. Make spending money more difficult and you're more likely to save over time. And those savings can be allocated toward your debts until they're paid off.

The bottom line

Another credit card may seem like the last thing you could possibly need if you're in debt, but a balance transfer card could help you save money with the right mindset. Consider a 0% Intro APR credit card to pay down debt faster, but don't forget that you'll have to change your spending if you want to get out — and stay out — of debt.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Money Moves to Make Before You Turn 40

Holly Johnson — Thu, 01 Oct 2020 17:32:44 +0000

Turning the big 4-0 is a perfect time to reflect on how far you've come in life, the milestones you've surpassed, and the relationships you've built. But for some people — especially those who don't have their financial ducks in a row — it's a time when panic sets in.

After all, turning 40 can make you painfully aware that time is running out to fix any financial mistakes you've made in the past. At the same time, you need to get serious about your money if you want to enjoy your golden years without financial stress. That's why financial advisers suggest a handful of money moves everyone should make before their 40th birthday.

1. Deal with consumer debt

Ryan Inman, a financial planner for doctors, says it's crucial to create a plan to deal with consumer debt well before your 40th birthday. That's especially true when it comes to high interest credit card debt. With the average credit card interest rate now over 17%, this type of debt can be difficult to pay off — and a big drain on your budget each month.

If your goal is paying off debt, there are multiple approaches to consider. You can attack it the old-fashioned way and pay as much as you can each month, or even try the debt snowball or debt avalanche methods. You can even apply for a balance transfer credit card that lets you secure 0% APR for up to 21 months.

Ideally, you should strive to have no debt other than your mortgage at this point in your life, says Inman.

While this may seem like a lofty goal, not having to make interest payments toward consumer debt will make it a lot easier to save more for retirement and play catch up on your investments if you're already behind.

2. Maximize your retirement savings

It's easy to think maxing out your retirement savings isn't necessary when you're young, but when your 40s hit, you become keenly aware of just how much more your nest egg needs to grow.

Financial planner Benjamin Brandt, who hosts a retirement podcast called Retirement Starts Today Radio, says he suggests anyone approaching 40 start maxing out their retirement savings. Remember that you'll set your contributions up through payroll out of your pre-tax income, so it's not as costly as it may seem. Also note that contributing the max to retirement will reduce your taxable income, which could mean a smaller income tax bill this year.

If you can't contribute the max, Brandt says to try to contribute more than you are now and inch your goal up slightly every year until you get there.

Brandon Renfro, an assistant professor of finance and financial planner in Hallsville, Texas, says that, at the very least, you should make sure you're getting the full employer match on your retirement plan. An employer match is the amount of money your employer might match when you save for retirement yourself. For example, your employer might agree to contribute up to 6% of your income each year as a match, but you have to contribute 6% to get the full amount.

Remember that your employer match is free money for the taking, and you should take advantage of any help you can get toward retirement savings as you approach your 40s.

3. Automate your finances

Certified Public Accountant Riley Adams, who also writes at Young and the Invested, says that your 40s are a good time to try to automate your investments if you haven't already. With more automation and money moving on its own, you're less likely to spend money on stuff you don't need or end up in a situation where you're inflating your lifestyle as your income grows.

"To protect yourself from yourself, learn to establish automated financial transactions to handle your money moves each paycheck," he says. "Doing so takes the hassle out of your hands and also puts your money to better use."

For example, you could set up an automatic bank transfer so a specific amount of money is transferred to a high-yield savings account every month. Or, you can set up automatic deposits into a brokerage account. Boosting your retirement savings in a workplace account can also be considered automation since the money is taken out of your paycheck automatically and invested on your behalf. (See also: 5 Ways to Automate Your Finances)

4. Purchase insurance based on your future finances

Financial planner Brenton Harrison of Henderson Financial Group says that, by your 40th birthday, you should also have your insurance needs squared away. However, you should strive to think of your insurance needs in future tense.

"It's tempting to determine your needs based on your current income and net worth," he says. "But for many people, their 40s are their peak earning years, meaning that the insurance needs you have before 40 might not be enough as your career progresses."

Harrison suggests sitting down and thinking about where you'd like to go in your career and where you plan to be financially in 10 years. From there, buy insurance based on that financial picture.

"If you know you can and will achieve a certain level of success, don't wait until you've reached it to start planning," he says.

While the types of insurance you'll need vary depending on your situation, think beyond the basics like homeowner's and auto insurance. For example, you may want to buy an umbrella insurance policy that extends your coverage limits in certain cases.

Also, make sure to get proper life insurance coverage," says financial planner Luis Rosa.

"If you have a family or are planning on having one in the near future, it is crucial to make sure that they are protected," he says. And you're much more likely to qualify for the coverage you need at a price you can afford when you're in your 40s (or before) and still relatively healthy.

5. Build an emergency fund

If you've struggled with your finances over the years and dealt with credit card debt multiple times, chances are good it's because you don't have an emergency fund. While any amount saved is better than nothing, most experts suggest keeping a separate fund for emergency expenses or job loss that's stocked with three to six months of expenses or more.

You never know what kind of roadblocks life will throw your way, but you'll be prepared for almost anything if you have savings set aside. And if you can't save six months of expenses, it's still best to start somewhere — even if you can only squirrel away a few thousand dollars.

Put your savings in an interest-bearing account and keep adding to it, and you'll eventually get there.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Pay Off These 4 Types of Debt

Denise Hill — Tue, 08 Sep 2020 17:32:44 +0000

Getting and staying out of debt is tough. Many people try and fail, or they succeed only to become ensnared the vicious cycle over and over again. Eliminating debt takes lots of grit and determination, and strategically attacking your debt will save you time, energy, and money.

Before you get started, you should know that each type of debt requires a slightly different strategy. Here's how to tackle different types of debt, and get rid of it once and for all.

Credit card debt

The best way to attack credit card debt is by using the debt snowball. With this method, you begin by attacking the smallest debt while paying the minimum on everything else. Once one debt is paid, you take all the money you were paying on the first card and apply it to the second biggest balance. Rinse and repeat.

You may be tempted to attack them based on interest rate, which is also known as the debt avalanche. And that will work. However, you must keep in mind that debt is more mental than it is logical. You probably didn't use a ton of logic to get into debt. And logic won't inspire you to get out of debt. The debt snowball approach allows you to get quick wins by conquering smaller debts before taking on the larger ones, which require more time and patience. Winning becomes a contagious habit that helps you build momentum.

You also may want to contact your credit card companies and request that they lower your interest rate. Some will and some won't, but it doesn't hurt to ask. (See also: 2-Minute Guide: How to Use Balance Transfers to Pay Off Credit Card Debt)

Car and personal loans

Auto and personal loans are a little different from credit card debt. However, they follow the same principle for repayment. First, make sure you understand the repayment terms and then contact the lender and ask them to reduce your interest rate.

In addition to using the debt snowball, a great repayment strategy for this type of debt is to call the lending agency and set up bi-weekly payments instead of paying monthly. The minimum payment doesn't change, you just make 26 payments a year versus 12. This lowers the total amount of interest you will pay over the life of the loan. When you pay more than the minimum payment, you'll slash months — even years — off the total repayment time.

Student loans

Despite how it may feel, paying off student loans is possible. You just need some discipline, patience, and a plan. For most folks, student loan debt is one of the most significant debts owed — second only to a mortgage.

The first thing you want to do is determine the total amount owed. You can do this by visiting the National Student Loan Data System or contacting your lender. From there, visit the Federal Student Loan Website to see if your loans can be consolidated, if your interest rate can be lowered, and if you qualify for any loan forgiveness programs. The Department of Education offers eight different repayment plans that may be able to assist you if you're considered low income or have special circumstances. They also provide repayment calculators and a host of other information and resources that can assist you in repaying your loans quicker.

Once you know the total amount owed, and have found a repayment plan that works for you, it's time to get busy. You want to throw ever extra dollar you have at this debt and make multiple payments a month, if possible.

Mortgage

The term "mortgage," translated from old French, literally means "death pledge." How fitting. There are several schools of thought on whether you should pay off your home early. For some people paying it off early makes sense, for others it doesn't. If you do want to knock the mortgage off your debt list, there are a few things you can do to expedite repayment.

Make bi-weekly payments

By simply splitting your monthly mortgage payment into equal parts where it's paid every two weeks, you can shave years of payments off a 30-year mortgage. If you pay more than the minimum, you expedite the process even more. You'll have to make arrangements with the lending institution to set up a bi-weekly payment plan and ensure that the extra money is applied directly to the principal.

Making one additional mortgage payment a year

This impacts the mortgage the same way making bi-weekly payments does. It's just done in one lump sum instead of over the course of a year. When you make the extra payment, you must specify that you would like it applied directly to the principal.

Make lump sum payments periodically

If you don't feel you have the ability to make bi-weekly payments or make one large additional mortgage payment, you can still pay extra on the mortgage as you are able. Paying an extra hundred dollars a few times a year will drastically speed up the repayment process. Every little bit helps.

Refinance from a 30-year fixed to a 15-year fixed

This may not make sense for everyone, but it is worth considering. By the time you're ready to begin aggressively paying off your home, you will have eliminated all other debt. You can afford to pay more. And your credit score will have gotten better and will allow you to refinance at a much lower interest rate. This strategy can cut the repayment time down by more than half.

But first, create an emergency fund

The quickest way to derail your debt repayment efforts is to have an unexpected expense. And you will have plenty. Establishing an emergency fund before you begin paying down debt is one of the keys to success. Having a few thousand dollars set aside just for emergencies will keep you on track, keep you from incurring new debt and do wonders for your psyche.

If you do have an emergency and have to use some of the money, you simply pause your debt repayment plan to replace what you spent. Use the extra funds you were applying to your debt to replenish your emergency fund. Once it's restocked, you go back to attacking the debt. (See also: Where to Find Emergency Funds When You Don't Have an Emergency Fund)

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why You Should Use a Personal Loan to Pay Down Debt

Holly Johnson — Wed, 02 Sep 2020 17:32:44 +0000

The average American with credit card debt carries a balance of approximately $6,354, according to USA Today. But the news is even worse in some states like Alaska, New Mexico, and Louisiana, according to an analysis of credit card debt from creditcards.com. Consumers in these three states carried an average of $10,685, $8,323, and $8,110 in credit card debt, respectively, as of 2017.

This is unfortunate, but it's not completely unexpected. It's easy to lean too hard on a credit card when you face a job loss or a loss in income, and high interest rates don't help matters much. The average credit card today carries an APR of well over 17%. With so much interest charged on revolving credit card debt, it's difficult to make a dent in the principal of your balance. This often leaves people languishing in debt for years, and even racking up more debt over time.

Consumers use many strategies to get out of debt, one of which involves applying for balance transfer cards. With a balance transfer card, you qualify for 0% APR for a limited time — usually 12 to 21 months. However, you're normally required to pay a balance transfer fee of 3% or 5% of your balance, and the introductory offer won't last forever.

Some people use balance transfer cards to successfully pay down debt at 0% APR, but others simply make the minimum payments and never make real progress against their debts. Those consumers usually end up exactly where they started once their card's introductory offer ends — with plenty of debt and a crushing APR.

There may be a better, more predictable way out of debt, however, and it involves a personal loan. (See also: 5 Times Personal Loans May Be Better than Credit Cards)

How a personal loan can help you climb out of debt

Applying for a new loan to work your way out of debt may go against the grain of common sense, but there are plenty of reasons a personal loan can work. For starters, personal loans come with low fixed interest rates that never change — even as low as 4.9% APR for consumers with good credit. Second, personal loans have fixed repayment schedules that tell you exactly when you'll become debt-free.

Because personal loans have fixed rates and fixed repayment terms, you also have a fixed monthly payment that stays the same. This is much different from the way credit cards work since your payment will change based on your APR and how much you owe.

With a personal loan to pay down debt, you know exactly what you're getting into. You know how much you'll need to pay each month, when your loan will be paid off, and what your interest rate will be the entire time. The best part is, a personal loan is not a line of credit you can borrow against. So once you use your loan proceeds to pay off and consolidate your credit card bills, you won't have the option to use your loan to rack up more debt. (See also: 10 Things You Need to Know Before Taking Out a Personal Loan)

How to do it the right way

If your goal is getting out of debt this year, a personal loan could be exactly what you need. But you'll be in the best position to help yourself if you go about repayment the right way.

Compare personal loan offers

Personal loans are offered by large financial institutions like banks and credit unions as well as several online lenders. Because there are so many options to get a personal loan, your first step is shopping around to compare offers in terms of their interest rates and fees.

The best personal loans come without an origination fee, any application fees, or hidden fees. If you want to shop around among multiple lenders in one place, you can also check out LendingTree. This website lets you fill out a single loan application and get offers from multiple banks and lenders in one place. (See also: 5 Personal Loan Fees You Should Never, Ever Pay)

Find your best match now with this handy comparison tool. Select the type of loan you’re looking for, the amount, your credit rating and state, to see the best options available for you.

Create a spending plan

Once you've shopped for a personal loan, you'll have an idea of your new monthly payment. At that point, it's crucial to create a monthly budget or spending plan to ensure you can stay on top of your new loan.

Sit down with your bank statements and figure out exactly how much you earn and how much you owe, including your new personal loan, housing costs, and other bills. From there, you should look for ways to reduce your spending. That may mean dining out less often, cutting cable for a while, or going on a spending freeze. Whatever you do, make sure you have a grasp on how much you can afford to spend each month while keeping up with all your expenses.

Stop using credit cards

Finally, don't forget that you have to stop using credit cards! The importance of this step cannot be overstated.

Paying off your credit card debt with a personal loan can put you in a precarious position where you're tempted to start using credit cards again. But if you start using credit, you'll likely rack up even more debt balances you'll have to pay off.

Your best bet is putting your credit cards away for safekeeping and sticking to cash or debit instead. To get out of debt — and stay out of debt — you must learn to live within your means. Not using credit cards is the only way to ensure you're living a lifestyle you can actually afford.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do With a Windfall

Emily Guy Birken — Mon, 13 Jan 2020 18:46:41 +0000

Theoretically, a sudden windfall should reduce your financial worries. Who doesn't appreciate getting suddenly richer?

However, making good decisions with a large infusion of cash can feel overwhelming, especially if your windfall comes about because of something negative. For instance, when I received a life insurance payout after my father passed away in 2013, the money was both emotionally charged and stress-inducing, and I was terrified of making a misstep.

If you've received a windfall, taking your time and making intentional decisions about the money will serve you better in the long run. Here's how you can do that.

Take a break before making any decisions

No matter how you received your newfound wealth, you're likely to have a number of strong emotions associated with the event. And we all know that emotions and rational decisions can struggle to coexist. That's why it's a good idea to take a little time before you make any decisions whatsoever with your new money.

If the money came to you because of a negative situation, such as a death in the family, the end of a lawsuit, or the sale of a beloved business, your emotions will inevitably color your view of the money. I personally found that I wanted Dad's insurance money to no longer be in my hands, because having it was a reminder of my loss.

Even if you have positive associations with the money (after a lucky weekend in Vegas or a surprise profit-sharing bonus from work), those fuzzy feelings may prompt you to make risky decisions to keep the good vibes coming. Letting some time pass between receiving your windfall and deciding what to do with it can help you view the money more dispassionately so you can make the best possible decisions with it.

So how long should you pause before deciding what to do? Depending on the size of the windfall, you might want to wait as long as six months (or longer) before making any decisions. This will give you time to process your emotions so that you're psychologically ready to make these big choices. (See also: Don't Make These 6 Dumb Mistakes With Your Financial Windfall)

Put it someplace safe

What you do with your money while you wait to make the big decisions depends partially on where your windfall came from. Life insurance benefits and other inheritance money can sometimes stay safely in the same account you'll be paid from. In these cases, it's common that your money will even earn some interest while it stays put. Simply keeping the money in place can be a good way to give yourself the emotional breathing room you need without worrying about making a preliminary decision.

Other types of windfalls, such as lottery winnings or an inherited retirement account, may give you the option of taking a lump sum or annual payouts. Choosing annual payouts (when available) will give you the opportunity to make lots of smaller decisions over several years, rather than overwhelming yourself with the need to make several big decisions at once.

For when you have no choice but to take your entire windfall into your hot little hands, stashing it in a money market account or high-yield savings account can be a good way to keep it safe. (See also: Interest Rates Are Rising: Here's Where to Keep Your Cash)

Consult a tax professional

The tax implications of your windfall could be a major deciding factor in how you choose to use it. Some types of windfalls, like life insurance benefits, can pass to you tax-free. However, for most types of windfalls, you can assume that Uncle Sam will want his cut.

For instance, the killing you made at the blackjack table is considered normal income to the IRS, which means you may have shifted into a higher tax bracket when you walked off with a cool $40,000. If you don't plan for this shift in your income taxes, you may find yourself staring down a nasty surprise come tax time. Your CPA can help you figure out the best way to navigate your sudden bump in income. For instance, they might suggest that you maximize your tax-deferred retirement contribution this year to help offset your windfall.

If you sold a business, inherited taxable property or accounts, or even got a major bonus at work, a tax professional can help you determine the most tax-efficient way to access and enjoy your new wealth so that you're not stuck holding the bag when the taxman comes calling. (See also: 14 Reasons Why an Accountant Is Worth the Money)

Get your financial house in order

Before you start making it rain, it's important to look at your current financial situation and see how your new money can make it better.

If you're carrying high-interest or revolving debt, using your windfall to pay it off (or at least pay it down) may not seem like a sexy use of the money. But reducing or eliminating your debt burden will give you more peace of mind and more financial freedom in the future. That money will turn into what feels like little windfalls every month when you don't have to send most of your paycheck towards your debt.

Similarly, if you haven't prioritized saving for retirement, your windfall can give you a great opportunity to improve your financial future. Maximize your 401(k) or IRA contribution this year (and enjoy the tax benefit), and use it as a springboard to send more money to your retirement every year thereafter.

Finally, keep some of your windfall as an emergency cushion. Knowing that you'll be covered the next time a financial emergency strikes is a great gift to your future self.

Have some fun

It does feel good to receive a large amount of money, and having a little fun with it is a great way to enjoy it.

No matter how a windfall comes into your life, splurging on something that you couldn't or wouldn't otherwise have can be a great way to enjoy your good fortune. Deciding to use a set amount of money however you please is a life-affirming way to mark the occasion of your windfall.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Protect Your Finances in Case of a Recession

Emily Guy Birken — Tue, 12 Nov 2019 08:00:07 +0000

According to the financial news sector, it seems probable that we're headed toward a recession. Grim-faced economists think our current historic economic expansion is headed for a fall, and the news of a looming recession couldn't feel scarier.

There's good news and bad news about these opinions. The good news is that no one has a crystal ball, which means even the savviest of economic forecasters can't possibly know what our economy will do in the future. However, we do know that certain financial trends cannot go on indefinitely. (Remember in 2007 when we all thought housing prices could only ever go up? We learned the hard way in 2008 that nothing keeps growing forever.)

So how can you prepare for a recession that may or may not happen in a time frame you can't predict? Thankfully, there are a number of actions you can take today to protect yourself, and your finances.

Bolster your emergency fund

Financial experts recommend that everyone build an emergency fund that could cover three to six months' worth of expenses. Your emergency fund can get you through a period of unemployment until you land your next job.

However, losing your job during a recession could be a little more dire than losing it at any other time. When the economy as a whole has taken a hit, it can be much more difficult to find another employer who is hiring. This is why the median unemployment length during the recession was more than 25 weeks (nearly six months), whereas the current median length of unemployment is just over 9 weeks.

Now is an excellent time to add to your emergency fund. Start an automatic transfer to your savings account with every paycheck, and look for other ways to beef up that fund.

If you don't have an emergency fund that could handle a lengthy unemployment, there's no need to panic. Remember: anything you can put away will be helpful if you do find yourself with a pink slip. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Create your Plan B budget

Another proactive step to take is to map out what would change about your spending habits if you were to lose your job or take a pay cut. Going through your current budget and identifying the items you could cut can help reassure you that your emergency fund will weather a loss of income.

You could even challenge yourself to make some small cuts now and see if you miss your former expenditures. That can free up some extra money (more for the emergency fund!) and help you feel more in control of your spending now and in the future.

Attack your credit card debt

If you're carrying a balance on your credit cards, now is a good time to get aggressive with your payoff plan. Carrying debt into a recession could make for an overwhelming burden if you experience a pay cut or a layoff. You'd hate to find yourself unable to pay your credit card bills — and have to deal with debt collectors — when you're already feeling financially stressed. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

Go to the doctor

The cost of health care can be prohibitively expensive, even for Americans with health insurance. According to a recent Bank of America Workplace Benefits Report, 53 percent of American employees have skipped a medical appointment, a test or procedure, or purchasing medication in order to save money.

This is why it's a good idea to schedule a checkup with your doctor now. Health care is expensive even when you have insurance, but it's even more expensive if you're uninsured. Getting a checkup while you have employer-sponsored coverage in place may head off any potential health (and financial) problems.

Resist the urge to tinker with your investments

Watching your retirement portfolio take a dive during a recession can be heartburn-inducing. It's easy to listen to that voice inside that's screaming at you to take your money out of the market or lose it all. But liquidating your investment accounts means you've turned your temporary, on-paper losses into permanent losses.

If we do go into a recession, plan on only looking at your portfolio quarterly — or even less often. This is one situation where putting your head in the sand will help your sanity and your bottom line.

If you're close to retirement, make sure you have cash

The only caveat to leaving your investments alone is if you're on the verge of retirement. Retiring during a recession can take a serious bite out of your retirement portfolio if you're still entirely invested for the long term. In that situation, you may find yourself retiring, but unable to access your retirement income because it has taken a recessionary hit.

If, in the next few years, you'll need to live off the money that's currently invested, then make sure you transfer some of your investments into cash equivalents. These will remain stable and available for you even if a recession hits just as you're ending your career. (See also: 9 Creative Ways to Boost Your Retirement Savings)

Be prepared

While there's no way of knowing exactly what's around the corner, we can all improve our financial lives by taking simple precautions. Whether we're on the brink of a recession or the reports of the economic demise have been greatly exaggerated, you'll be glad you took these steps to protect your money.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Steps to Avoiding Credit Card Debt Over the Holidays

Holly Johnson — Thu, 07 Nov 2019 08:00:07 +0000

Holiday debt may be incurred unintentionally, but the consequences can linger long after you put away the twinkly lights and stockings. A 2018 report from Magnify Money showed that consumers polled added an average of $1,230 in holiday credit card debt during that season. Not only did 64% of respondents agree their new holiday debt took them by surprise, but almost half of respondents (49%) said it would take them five months or longer to pay off remaining holiday bills.

If you're struggling with debt already, the last thing you need this year is a new pile of debt to contend with. Unfortunately, the constant pressure the holidays bring can leave you feeling like you're set up to fail from the start. Here are the best steps you can take now to avoid a holiday debt hangover.

1. Create a holiday shopping budget

First, you have to have an idea of how much you plan to spend on holiday gifts before you can decide how the funds will be used.

If you started a holiday savings account earlier this year, you may have no trouble logging in to see how much money you have set aside. If not, you'll need to take a close look at your checking and savings accounts to see how much "extra" money you'll have to spend this year.

As you assess your finances and excess cash, make sure to think through all your regular bills and expenses that need to be paid each month. Also, jot down any work-related year-end expenses you'll need to cover, such as holiday travel or holiday parties.

Then consider how many additional paydays you have until the holidays, as well as how those funds will need to be allocated.

2. Figure out how to earn extra money

If you find you don't have as much extra cash for the holidays as you hoped, you may want to get creative when it comes to finding more cash. This could mean picking up a few extra shifts at work, but it can also mean picking up some work on the side for a few weeks as the holidays approach.

If you're looking for easy ways to make money before the holidays this year, look for side hustles you can start without a big investment of time or cash. Try walking dogs, babysitting neighborhood kids, or selling stuff you own and don't use anymore, for example. (See also: How to Turn Your Expertise Into a Side Hustle)

If you have any points leftover on rewards credit cards, you can also see about cashing them in for gift cards or merchandise.

3. Make a holiday shopping list

Once you know how much money you'll have to spend this year — or at least have a general idea, you need to make a list of people to shop for. While kids and family members will obviously make this year's list, don't forget to add in gifts for an employer or your coworkers as well as any holiday gift exchanges you participate in.

Write down this list on paper, or paste it in a spreadsheet along with the amount of cash you have to spend this year. (See also: Take Control of Your Money With These 10 Free Spreadsheet Templates)

4. Make some essential cuts

Next, take a close look at your holiday shopping list to see who needs to be cut. You may find you have family members or friends you don't need to buy a gift for because you never see them. Or perhaps you have older kids in the family who no longer receive gifts from Santa.

If you participate in holiday gift exchanges and are tired of doing so, those are usually the easiest to cut out. Call the person who normally organizes the exchange each year and let them know you're on a tight budget. If they don't like it, that's too bad.

If you plan to cut family members you normally shop for from your list, it might be wise to let them know ahead of time — especially if they also buy gifts for you or your family. Most people will understand you're trying to spend less and avoid debt this year if you reach out and explain the situation.

Either way, decide who you want to shop for and remove everyone else from the list. Then you can decide how to divvy up your holiday budget for each person that's left. Maybe you have two children and allocate $150 to each of them while setting aside $20 per person for other people on your list. Whatever it is, put your budget and plan in writing so you can stick to it.

5. Shop sales to make your money stretch further

Having an idea of how much you plan to spend on family and friends is the best way to avoid going over your budget this holiday season. When you know for a fact you have $20 per person to spend on family members, you're in a better position to shop for gifts in that price range instead of overspending, or winging it as you go.

While Black Friday and Cyber Monday tend to bring excellent prices and sales on everything from electronics to clothing and home decor, don't forget to keep an eye out for low prices for anything you want to buy. The internet is your friend when it comes to searching for deals and comparing prices across multiple stores. You can even sign up for the Honey app, which finds the best coupon code and automatically applies it to your cart whenever you shop online.

6. Have a plan to avoid debt when you buy gifts

You may plan to use debit cards for online purchases and cash when you shop in stores this year, and that's perfectly okay. Just remember that, as a general rule, credit cards are considerably safer when it comes to online purchases due to the way the Fair Credit Reporting Act (FCBA) protects against fraudulent purchases.

If you decide to pay with credit in order to rack up cash back or qualify for consumer protections like extended warranties or purchase protection, make sure you only charge gifts you planned for in your holiday budget ahead of time. Also make sure you pay your credit card bill in full as soon as it arrives. As holiday shoppers from years past willingly admit, it's far too easy to let year-end bills linger.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Your Payment History Has a Huge Impact on Your Credit Score – Here's How to Improve It

Holly Johnson — Tue, 03 Sep 2019 08:00:08 +0000

Keeping an eye on your credit score may be more important than you think — even if you haven't had to use it yet. After all, you'll need good credit if you hope to take out a car loan, rent an apartment, or get a mortgage to buy your first home. Believe it or not, your credit score can also impact how much you'll pay for auto insurance — and whether you get hired for certain jobs.

If you hope to refinance your student loans with a private lender to score a super-low interest rate, you'll need good credit for that. Want to take out a business loan and follow your dreams as an entrepreneur? You'll need good credit for that, too.

The list of reasons to care about your credit score goes on and on, and the number of negative ways poor credit can impact your life is nearly endless, too. That's why, like it or not, we should all take steps to keep our credit scores in tip-top shape.

How your FICO score is determined

To accomplish this goal, however, it helps to know exactly where your credit score comes from. How can your entire credit history be represented by a three-digit number? And what factors can influence your score now and later on?

The most popular type of credit score is your FICO score, and the FICO corporation offers some pretty straightforward answers when it comes to the factors they consider.

The five factors that make up your FICO score include:

Payment history: 35%
Total amounts owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%

When you break down your FICO score this way, it's easy to see how you could use this information to your advantage. Overall, the best FICO scores go to those who learn to play by the rules with each of these factors and exhibit better credit behavior than most of their peers.

How to create an excellent payment history

Based on the above percentages, you'll see one factor that should be especially easy to stay on top of. It may take time to pay down debt to decrease the amounts you owe, but you should be able to pay your bills early or on time, right?

Your payment history is one FICO score determinant that you have absolute control over, and this means you have the potential to make a big positive impact. To polish your payment history, make the following money moves. (See also: 8 Money Moves for the Newly Independent)

Set up all your credit cards on auto-pay

If you're someone who is prone to forgetting about your bills or paying them late, it can help to set all your bills up so the minimum payment is made on your behalf before your payment date. You can typically do this by connecting your credit card accounts to your bank account and selecting automatic payments. While you can still pay your cards off manually each month, setting up auto payments ensures you'll never be late if you simply forget.

This strategy can be tricky if you rarely keep extra money in your bank account, however, so you may want to consider saving up a "buffer" so any automatic payments made don't cause an overdraft.

Pay your credit card bills more than once each month

If you're not interested in setting up automatic payments on your credit cards, you can also consider paying them off more than once per month — and even once per week. Not only can paying your credit card bills more than once per month help you avoid late payments, but it might also help you stay on track with your budget and spending goals.

Here's a good example of how this might work: Imagine you budget $750 per month for groceries and gas. If you only checked in on your credit card bill at the end of your billing period, it might be easy to spend more than you budgeted in these categories and others.

If you checked in on your credit card bill weekly and made payments each time, on the other hand, you'd have a better idea of how much you're spending throughout the month and be in the best position to avoid an ugly end-of-the-month surprise.

Look for ways to automate your other bills

Also, remember that bills other than your credit card bills make up your payment history, and that your mortgage payment and car payment can also play a role. If you're able, setting up automatic payments for these bills can help you maintain a perfect payment history and avoid a ding on your credit score.

If you have a credit card that earns rewards, setting up all your bills to be paid automatically with a credit card instead of by check or electronic funds transfer can boost your rewards haul each year as well. And provided you pay your balance in full each month, the rewards you earn can truly be "free."

Institute a weekly financial check-up

Finally, it always makes sense to plan a weekly meeting with your checkbook, your bills, and anyone you share your finances with. This is especially true if you're trying to live on a budget or spending plan since you'll need to check in with your spending fairly regularly to see where you're at.

To be more specific, it can be helpful to set aside some time every week to check and see which bills you have due, how much you've spent in regular categories, and how much of your budget is left for the month. Just remember that you're more likely to stick with it if you commit to a specific date and time for your meeting, such as Saturday mornings or Monday nights.

Final thoughts

Your payment history makes up the bulk of your FICO score, but it's also one area of your life where you have the utmost control. Any steps you can take to create a perfect payment history can only work to your advantage, so make sure to get started today.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 4 Worst Kinds of Debt to Have in 2019

Holly Johnson — Tue, 30 Jul 2019 08:00:07 +0000

Experts often say that debt can only be considered "good" if it's attached to an appreciating asset. Borrowing money to purchase a home that should rise in value over time is usually considered a smart move, for example. A business loan can also be a net positive provided the funds are used to help you become more profitable over the years.

On the flip side, there are plenty of kinds of debt that just aren't worth it — especially if the amount you owe is more than you can handle or your interest rate is absurdly high.

If your goal is building wealth and enjoying a life free of financial stress, your best bet is avoiding debts that make getting ahead harder than it has to be. Here are some of the worst offenders.

Student loans

Student loans can be a net positive for your life if you borrow as little as you can and parlay your degree into a profitable career. And since federal student loans tend to come with low fixed interest rates, student debt doesn't have to ruin your life.

But what happens if you overpay for school — or if you borrow a ton of money but never graduate?

Far too many students have found out the hard way just how unforgiving student debt can be. For starters, it's nearly impossible to discharge student loans in bankruptcy, so you're probably stuck with your student loans until you pay them off — no matter how long it takes.

The high cost of higher education also means students are stuck borrowing more and more for a basic college degree. A report from College Board noted that, on a national level, even a public, four-year degree cost students an average of $21,370 per year for the 2018-19 school year when you add in room and board. That means it costs nearly six figures to earn a Bachelor's degree — and that's if you choose an in-state, public school.

If you find yourself struggling with student loan debt, consider looking into alternative payment plans like income-driven plans or refinancing your student loans with a private lender. (See also: Should You Refinance Your Student Loans?)

Credit card debt

Credit card debt is another wealth killer that can make it significantly harder to get ahead in life. Not only is credit card debt unsecured by any sort of asset, but the average credit card interest rate is now over 17%. That means that, no matter what you purchased on your credit card or how unnecessary it was, you could be paying out the nose to carry that debt from year to year.

If you're struggling with credit card debt, the first thing you should do is stop using credit cards. Then create a plan to pay down debt, possibly using the debt snowball or debt avalanche method. You can also use a balance transfer credit card to secure 0% APR for a limited time, but this strategy only works if you have the discipline to quit using credit cards as a crutch. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

Payday loan debt

Payday loans are meant to be short-term loans that help you get to the next payday, and they're mostly targeted at consumers with poor credit. But since they charge high fees and interest rates as high as 400%, these loans can trap you in a situation where you have to get one payday loan after another to pay your bills.

When it comes to payday loans, the best step you can take is to avoid them altogether. If you're stuck with payday loan debt or in a payday loan cycle that's hard to break, on the other hand, you'll have to find a different strategy.

Consider applying for a personal loan for bad credit that can help you pay off your payday loan and stay afloat until your next payday. Your interest rate may be high, but hopefully the pain will only be temporary.

Also, look for ways to cut your spending or earn more money so you can pay off your high-interest loans and keep more of your income for yourself. Sell items you don't need online, pick up an easy side hustle, or simply cut your bills for a few months, and you might buy enough time to get in a position where you no longer need payday loans just to get by.

Auto debt

According to the most recent report on the State of the Automotive Finance Market from Experian, the average new car payment worked out to $554 during Q1 of 2019 for buyers with all types of credit. Worse, the average new car loan worked out to $32,187 with an average loan term of more than 68 months.

Even if you need a car to get to work, there's just no excuse to borrow this much — or for so long. This is especially true if you're not saving enough money each month, you don't have an emergency fund, or your income isn't very high.

Remember that cars can easily lose 20% of their value during the first year of ownership. After that, they can lose up to 10% of their initial value for the next four years, according to CarFax. Unfortunately, far too many Americans just trade their cars in at that point, starting the process over again with a huge new loan on a depreciating asset.

You probably need a car to take care of your children and get to work, but you're better off if you borrow less and pay it off as fast as you can. Consider a used car with a much lower initial price, then choose a shorter repayment term so you can get out of debt faster. And once your car is paid off, keep it forever. (See also: 8 Questions to Ask When Buying a Used Car)

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 7 Best Ways to Earn Travel Points and Miles Without a Credit Card

Holly Johnson — Wed, 19 Jun 2019 08:00:09 +0000

Points and miles make it possible to see the world at a much lower cost, but that doesn't mean everyone is in the best position to earn them. For starters, travel rewards credit cards offer the easiest way to earn rewards on your regular spending, but some of us don't have the 740+ credit scores required to get approved for them. Not only that, but consumers struggling with credit card debt may not want to run out and pick up a rewards credit card — especially since travel credit cards tend to charge high interest rates.

Now, here's the good news: You can earn travel rewards without a credit card, and some strategies are a lot easier than you think. If you want to earn rewards for travel but can't use credit right now, here are the best options to consider.

1. Join airline dining clubs

If you dine out often and want to earn airline miles, you should check out airline dining programs from Delta SkyMiles, Southwest Rapid Rewards, American AAdvantage, and more. These dining clubs will award you airline miles simply for signing up and eating at participating restaurants. You can even earn sign-up bonuses of up to 3,000 miles for dining out at least a handful of times within the first 30 days.

Keep in mind that dining clubs are free to use, and if you're going to dine out anyway, you might as well take advantage. At the very least, check out each of the dining clubs for airlines you fly with to see if you like any of the participating restaurants in your area. (See also: Everything You Need to Know About Airline Dining Rewards Programs)

2. Shop through airline shopping portals

If you shop online frequently, like most people do, make sure you're clicking through a portal each time you make a purchase. Airlines like United, Alaska, American, and Southwest have their own shopping portals that give you bonus miles for each dollar you spend.

All you're required to do is log onto your account and "click through" to each store's website before you shop for your purchase to qualify. And you don't have to use a credit card to pay for your purchases, either. Instead, you can use other forms of payment like PayPal or debit. (See also: How to Use Airline Shopping Portals to Cash In On Rewards)

3. Join airline and hotel loyalty programs for free

Make sure you're joining airline and hotel loyalty programs for brands you frequently use. This is especially important if you're booking paid travel. By including your loyalty number on your hotel or airline reservation, you'll earn points or miles for any travel you complete.

How much can you earn with paid travel? That totally depends on the airline or hotel and their basic earning structure. As an example, Southwest Rapid Rewards currently gives you six points per $1 spent on their basic Wanna Get Away fares, but you can earn 12 miles per $1 spent on their Business Select fares. Delta SkyMiles, on the other hand, currently awards five miles per $1 spent to basic members who book Delta-marketed flights.

4. Book all your hotel stays and rental cars through a portal

Whenever you book travel, take a moment to think of the ways you could earn additional travel rewards for each dollar you spend. For example, most airlines work with hotel and rental car partners, and they will award you miles in their programs if you book your travel through their website instead of somewhere else.

Many airline loyalty programs even offer bonus rewards when you book vacation packages and cruises, so make sure to scan your options before you book any type of travel online. With American AAdvantage Cruises, for example, you can earn up to 10,000 bonus miles per cruise booking. This is a nice perk if you were going to book a cruise anyway.

5. Check out PointsHound.com and RocketMiles.com

Check out PointsHound and RocketMiles, since both will award you airline miles in specific airline loyalty programs for each qualifying hotel booking you make.

PointsHound, for example, promises up to 10,000 miles for some hotel stays and you can choose from over 300,000 hotels and resorts worldwide. You also get the option to choose from popular airlines like Virgin Atlantic, United Airlines, American Airlines, Frontier Airlines, and more.

6. Take online surveys

Several airlines give their loyal customers the opportunity to earn miles for answering survey questions online. You won't earn a lot of miles with this strategy, but it's still better than nothing. And if you have some time to kill, spending a few hours answering easy survey questions can help you score a few hundred airline miles you can use later.

Here are a few of the top airline survey portals you should check out.

7. Watch for special promotions

Keep an eye out for special promotions from your favorite airline and hotel loyalty programs. From time to time, you can earn bonus points or miles for sharing a post or hashtag on social media or making a specific purchase.

The best way to find out about special promotions is signing up for emails from your favorite travel brands and following them on social media. Once you do that, you can watch out for opportunities to earn easy bonus miles that add up over time.

The bottom line

If you don't want a credit card or can't qualify for one right now, that doesn't mean you'll never be able to earn travel rewards. As highlighted above, there are quite a few ways to score points and miles if you're willing to do the legwork. But the spoils go to those who put in the effort, so start trying to earn bonus rewards today.

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8 Things You Need to Know About Debt Management Plans

Holly Johnson — Wed, 19 Sep 2018 08:00:12 +0000

If you're in debt and struggling to dig your way out, you've probably spent a lot of time trying to come up with a fix. Maybe you transferred your balance to a balance transfer card to score zero interest, and wound up racking up even more debt. Perhaps you've resorted to selling stuff to raise extra funds. Maybe you picked up a part-time job or extra hours at work to keep up with your monthly payments.

Whatever you've tried, it's possible it's just not enough. Enter debt management, which is an arrangement to consider if you need outside help to manage your bills.

What's a debt management plan?

With a debt management plan, you work with a credit counseling agency who creates a realistic plan that can help you get out of debt. Typically, you deposit money each month with this agency, who in turn uses it to pay your unsecured debts on your behalf according to a payment schedule you agree upon.

When you get on a debt management plan, your creditors may also agree to waive certain fees or lower your interest rate. Obviously, these concessions could help you get out of debt even faster.

Still, there are details you should know and understand before you sign up for a debt management plan. These plans can be a lifesaver if you're struggling, but they're not for everyone. Here are some pros and cons you should be aware of. (See also: 5 Debt Management Questions You're Too Embarrassed to Ask)

1. Debt management is not a loan

While debt consolidation requires you to take out a new loan to consolidate your existing debts, debt management doesn't require a loan at all. "Debt management is a process for paying off debt through creditor concessions like interest rate reductions and late fee forgiveness," says Mike Sullivan, Director of Education and a personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency.

You're not taking out a new loan, but instead creating a long-term plan to pay off the loans you already have.

2. It can take up to five years to complete

Since debt management requires you to work with a credit counselor to create a realistic repayment plan, it can take a while to work your way through one of these plans. Sean Fox, co-president and CRO of Freedom Debt Relief, says debt management can take two to five years to complete, with the longer timelines typically reserved for those with the most debt.

That may seem like a long time, but remember that debt management intends to help you repay all the money you owe. If you owe a ton on credit cards and other loans, you can't expect your problems go away overnight.

3. Debt management can save you money each month

You may be wondering how debt management can help you become debt-free when you're barely keeping up with bills as it is. Fox says it's important to remember that you'll typically make just one monthly payment with a debt management plan, and that payment should be less than the total of all your debt payments now.

The lower payment is often the result of waived fees and negotiated interest rates, he says. Most of the time, your debt management plan will have you move excess funds resulting from lower monthly payments into a savings account.

4. It isn't free

While debt management is a solution that works for many debt-saddled consumers, credit counseling agencies that offer these plans do charge for their services — even if they're a nonprofit.

Fox says the monthly fees collected by enrolled consumers typically fall in the $10-$15 range. However, these fees are typically offset and more than made up for via savings gleaned from reduced interest rates.

5. Debt management should increase your credit score

One common alternative to debt management plans is something called debt settlement. With debt settlement, you work with a company (typically a for-profit) that offers to negotiate your debts down so you pay less than what you owe. One of the biggest downsides to debt settlement is the fact that debt settlement plans usually ask you to stop paying your bills, and that can cause your credit score to plummet.

"Debt settlement will always create a credit rating free fall," says Sullivan.

With debt management, on the other hand, your credit score should actually increase as the process moves along. This is because, over time, your credit utilization will go down as you pay off debt. Not only that, but the on-time payments made by your credit counseling agency (as you make your own payments on time) will make a positive impact as well. Since your utilization is the second biggest determinant of your FICO score and your payment history is the biggest factor, debt management can help you raise your score by default. (See also: 4 Ways to Make Debt Repayment Fun)

6. Debt management is not for everyone

While debt management plans can be helpful for consumers who see them through, they aren't the ideal option for everyone. Fox says that debt management is suited for people who are facing a less-severe financial hardship than a typical debt settlement customer. Generally speaking, this means consumers whose credit card debts are $7,500 or less, although there are plenty of exceptions.

For consumers with a lot more debt than this, you may need more than a reduced interest rate and debt management help to make any progress. Some may even want to consider bankruptcy.

7. You'll learn new money management skills

Kyle Winkfield, managing partner of wealth management firm OWRS Firm, says that debt management plans can help you learn to use credit to your advantage.

Creating a management plan for how to effectively and efficiently pay off debt is "the best case scenario for leveraging debt in your favor, building credit, and instituting financial discipline," he says. Once you've established a system and debt is being paid off, you also learn the valuable lesson that having less debt means having more money to save and invest. For that reason and others, "debt management is actually a great lifetime tool when properly structured and executed," he says.

Ideally, you will take the lessons you've learned paying down debt in a debt management plan and use them to avoid debt in the future. (See also: 15 Tips From People Who Paid Off an Incredible Amount of Debt)

8. You can do it on your own

Finally, it's important to note that many of the tasks debt management plans perform can be done by you. For example, you may be able to get your creditors to lower their interest rates and waive fees if you call and explain your situation. Whether you're using a debt management plan or not, you could also sit down and take a look at your spending and create a budget that could allow you to spend less and throw more money toward your debts every month.

If you're considering a DIY approach, Winkfield suggests starting with a comprehensive list of every creditor with updated balances and interest rates. You also need to know what your required monthly payments are. From there, you should track your monthly expenses to see if you have money available each month that can be redirected to eliminating debt.

Finally, you can create a debt repayment plan that will pay off all your bills over time. Many consumers like the debt snowball method where you focus on paying off your smallest debts first and make minimum payments on the rest, he says.

A debt management plan can do all of tasks with you, and may be the best option if you're feeling overwhelmed and need help to start. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

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How to Tackle Your Summer Vacation Credit Card Debt

Lindsay VanSomeren — Thu, 09 Aug 2018 08:00:10 +0000

It's easy to rack up credit card debt while on summer vacation. After all, finances are probably the last thing on your mind, and you have a handy credit card in your wallet whenever you need something. You can sit back with a margarita in hand without having to look at that credit card statement until next month.

When summer comes to a close, however, it can be quite a shock to see how high your credit card balance has grown. It's not a fun situation, but with a plan in place, you can get out of credit card debt before the snow starts to fall. Here's how to do it.

1. Assess your new debt

As tempting as it might be, now's not the time to hide your head in the sand. In order to create a plan to get out of credit card debt, you first need to know how big of a monster you're fighting.

Log into your credit card accounts — all of them — and record two things for each of your credit cards:

How much you owe.
What the interest rate is.

It's also a good idea to go back over your credit card statements to make sure everything's kosher. Look for any double-charged expenses (maybe that waiter at the bar was a little loose with his fingers while keying in your purchase), or any charges you don't recognize, as this could be a sign that your credit card information has been stolen. (See also: 7 Ways to Avoid Credit Card Fraud While Traveling)

2. Check in with your budget

It's a good idea to check in with your budget again if it's been a while. In this case, it also serves another purpose: Finding out how much extra you can afford to pay toward your debt each month.

Go through each line item and ask yourself if there's any way you can reduce it without sacrificing too much. For example, do you really need to pay for cable if you're mostly watching Netflix, or can you start bringing leftovers for lunch instead of going out to pricey restaurants? Cut those corners now and it could make a huge impact in your debt repayment plan.

3. Commit to a monthly payment amount

After you've gone through your budget and found extra money, it's time to commit to a monthly payment amount. If at all possible, strive to pay more than the minimum monthly payment amount for your credit card debt. The more you can afford to pay each month, the sooner you'll be out of debt.

Once you decide on a number, the final step is to set it up on autopay. That way, it's even harder to self-sabotage your debt-payoff plan. (See also: How to Manage Money When You Hate Thinking About It)

4. Decide which credit cards to pay off first

If all of your credit card debt is on one credit card, this'll be easy: pay off that credit card and you'll be done.

But what if your debt is scattered across two or more credit cards? In that case, you'll need to make the minimum payment on each. If you have money leftover after making the minimum payments, you'll need to decide where to send it.

Two popular debt-payoff methods are the debt snowball and debt avalanche methods. The debt snowball method has you paying off the credit card with the smallest balance first, then moving onto the next smallest balance. The avalanche method is similar in execution, but instead of starting with the card with the smallest balance, you start with the card with the lowest interest rate until your debt is gone.

5. Throw extra money at your debt

So, you've committed to a monthly debt payment that is hopefully higher than the minimum required. This will get you out of debt on schedule, but wouldn't it be better to get out of debt even sooner?

That's why it's a good idea to throw any extra money you have coming in toward your debt. If you earn any money from a side hustle, selling unwanted items, unexpected gifts, or a raise at work, throwing it at your debt rather than buying a new big-screen TV can go a long way toward getting out of debt sooner.

6. Make a savings plan for next year's summer vacation

In order to avoid a repeat event next year, why not take the time now to plan a savings strategy so you don't go into debt again? Figure out a target savings goal, either based on how much you spent this year, or the cost of a trip you want to take next year. Then determine how many months you have between now and your vacation. Finally, divide your target savings goal by how many months you have to save, and strive to set that amount aside each month.

For example, if you have six months until you want to go on a $1,800 cruise vacation, you'll need to set aside $300 per month until it's time to go. (See also: How to Build Your Best Travel Budget)

After all, won't sipping cocktails on the beach be that much sweeter if you're not worrying about facing a debt hangover once you return?

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This article is from Lindsay VanSomeren of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 5 Worst Money Mistakes New Grads Make

Alicia Rose Hudnett — Wed, 27 Jun 2018 08:00:11 +0000

It's no secret that personal finance education is lacking at every level throughout our school system. And this is nowhere more evident than when you graduate from college and are thrown into a new reality you've spent little to no time preparing for. In fact, you've probably spent years taking classes on just about everything but how to manage your money.

Now, you're tasked with making decisions that can affect the rest of your life. How do you know what to avoid? Here are a few of the most common financial mistakes new grads make, and how they can steer clear of them.

1. Ignoring your personal finances altogether

Your life is dictated by your financial situation. The sooner you realize that, the better. The first step is recognizing that you need to take an active role in learning about money management. You need to begin building a financial plan. Understanding financial concepts and forming strong financial habits now will have lifelong benefits.

Your financial plan is flexible and can change often, especially early on in your career and life. But now is the time to begin thinking about short-term, medium-term, and long-term financial obligations and goals. Take time to learn about important financial building blocks, like starting an emergency fund, beginning retirement contributions, and paying back student loans.

Make personal finance part of your everyday life now, and do one thing every month to increase your financial knowledge. (See also: The Financial Basics Every New Grad Should Know)

2. Overspending on your current lifestyle

Most likely, you'll be earning more money at your first post-college job than you ever have before. And it's OK to adjust your lifestyle from college student status to adult. But be realistic about the lifestyle you can really afford.

When you get your first paycheck, look it over to understand exactly what taxes you're paying and how much you have deducted for benefits like health insurance and retirement savings. Next, build a budget to cover your essential monthly expenses, savings, and debt repayment. Consider how much you have left in your budget to allocate toward your lifestyle expenses. If you'd like more money in this area, either cut back on your living expenses, perhaps by looking for a cheaper place to live, or find a way to bring in more income.

As you'll soon learn, every year you get older, your financial priorities will increase — often significantly. Time is one component of your financial plan that you can't get more of, so take advantage of these early years to focus on saving as much as you can. (See also: 4 Smart Things You Should Do With Your First Real Paycheck)

3. Delaying saving for your retirement

Besides paying for your current lifestyle, the number-one priority of your working years is saving for a time when you'll no longer be working. You are never too young to start saving for retirement — but at some point, you may be too old. Oddly, we're never taught in school about what retirement means or about how to save for it.

The biggest determinant of retirement security is your personal savings. Whether you contribute to a workplace retirement plan like a 401(k), your own IRA, or both, make a contribution count for every single year beginning with your first job. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

When you first start out, it's OK to set small savings goals and work on them throughout your career. For example, use every increase in salary as a time to increase your saving rate by at least half of your salary raise. And every time you change jobs, never decrease your saving rate — either stay at the same rate or take the opportunity to increase it. It's not unrealistic to think that you may spend 30 years or more in retirement — and it can take you just as long to save up for that goal. (See also: 5 Biggest Ways Millennials Risk Their Retirements)

4. Neglecting your student loans

If you're a recent college graduate, there's a good chance your loans make up part of the $1.5 trillion student loan debt owed in this country. While you may be tempted to ignore your loans until repayment is set to begin, or because you're overwhelmed by how much you owe, you need to take an active role in understanding everything you can about your loans.

First, determine what type of loans you have: federal or private. Next, if your payments haven't already begun, find out when you will need to start repaying. You'll also want to know the total amount owed and the interest rate on each of your loans. Then, begin researching different payment and consolidation options. (See also: What's the Difference Between Student Loan Refinancing and Consolidation?)

Finally, build your loan payment into your budget early on and take strides to pay it off as quickly as you can, perhaps even using bonuses and tax refunds to pay down your principal balance. Gone are the days of thinking of your student loans as "good debt" and letting them hang over your head for your entire career. Many people are now finding out what a burden they are in retirement. (See also: How to Keep Student Loans From Wrecking Your Retirement)

5. Taking on credit card debt

A good credit history is an important part of your overall financial health. And credit card use is a viable way to establish that history and demonstrate your credit worthiness to lenders. But responsible credit use is charging only what you know you can pay off at the end of every month — not buying items that you can't afford in the first place and financing them at very high interest rates over several years. (See also: The Millennials Guide to Avoiding Credit Card Debt)

Entering the world of adult finances is tricky. Between learning about your budget and cash flow, building your emergency savings and retirement accounts, and figuring out how to manage your loans and debt, consider the above advice Personal Finance 101 — a mandatory course for everyone.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Happens to a Student Credit Card After You Graduate?

Lindsay VanSomeren — Wed, 23 May 2018 08:30:32 +0000

Getting a student credit card while you're in college is a smart move. It can be a great tool to learn how to handle credit cards correctly without accidentally drowning yourself in tens of thousands of dollars' worth of debt.

Moreover, credit cards allow you to get ahead of the curve by building your credit history before you even graduate. This single factor alone makes up about 15% of your entire credit score. It's also one of the hardest factors to manipulate, because if you want to increase your credit history, about all you can do is literally sit and wait for your score to improve.

But what happens when you graduate, and you're no longer a student? You have a few options in this case. You may be able to upgrade your card to its non-student version, keep it open as-is, or close it. We'll walk you through each of the options to help you decide which is right for you.

Contact your credit card company

Each credit card issuer has different policies with these cards when you graduate. They may hide the language about what happens after you graduate in their terms and conditions, or, more commonly, they don't even publicize it at all. That's why the most important thing you can do is to call up your credit card issuer and let them know about how your situation has changed.

Make sure to tell them when you graduated, along with any change of address. If you have a job already lined up with a definite salary, this also may give you more options.

Generally, credit card issuers will give you two choices to continue using the card: You can keep the student credit card as-is, or upgrade the student credit card to its full-fledged, non-student version.

If your credit card is upgraded

If you are already earning a higher salary than you did as a student (even if it does seem small at first) and paid your bills on-time as a student, credit card companies might be more likely to upgrade you to the full-fledged credit card, along with a credit limit increase.

This can be a double-edged sword. On one hand, a credit limit increase may decrease your credit utilization ratio, a measure of what portion of your available credit you're using. This single factor alone has an even bigger effect on your credit score than credit history. It accounts for 30% of your score. (See also: 5 Factors With the Biggest Impact on Your Credit Score)

But people are often tempted to max out their credit card with their newfound credit line, and this can hurt your score. Don't let this happen to you; instead, it's still best to pay off your entire credit balance each month.

You may also be eligible for better rewards or lower interest rates if you're upgraded to the non-student version. But again, don't let this tempt you to run up a balance on your credit card. If earning rewards is your goal, it's best to only put your normal daily spending on your card that you can afford to pay off in full at the end of each month.

If your credit card isn't upgraded

In this case, the credit card issuer might not close your card, but they may not upgrade it. Basically, you're stuck with your old college credit card.

If you want a higher credit limit or want to earn better credit card rewards, you always have the option of applying for a full-fledged credit card.

If you decide to go ahead and keep your student credit card open (a wise decision, which we'll discuss below), remember to make a purchase with it at least a couple of times per year and pay off the charge. Otherwise, your credit card may be closed automatically for inactivity without any input from you.

Another way to automate this is by putting a recurring small charge on your student credit card — say, your Netflix or Spotify subscription — and setting it up on autopay so you don't even have to think about it.

A word about closing your student credit card

Regardless of what happens to your student credit card after you graduate, you always have the option of closing it. However, in most cases, this isn't the best option. Doing so will expunge at least part of the credit history you've worked so hard to create. Unless you have other credit cards, you'll basically be starting over from scratch during the exact period of your life when credit is most important to build.

For example, if you plan on renting an apartment, getting an auto loan for a car to get to your new job, or even applying for some jobs, you'll need the best credit score possible. Lenders, landlords, and some employers check credit reports. Keeping your student credit card open — in whatever form that might be after you graduate — is often the best option unless you truly do want to simplify your life and are prepared to take a likely hit to your credit score.

Bottom line

Graduating from college is one of the most exciting — and terrifying — times in your life. Figuring out what to do with your student credit card after you graduate doesn't need to add to that stress.

All you have to do is make a quick phone call to your credit card issuer and explain the situation. Then spend a few minutes thinking about your strategy — Do you want to close the card? Keep it? Apply for a new credit card? Make a decision and stick with it so you can move on with your life. After all, you've got more important and exciting things to focus on now.

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This article is from Lindsay VanSomeren of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: